Galaxy Nutritional Foods, the Florida-based producer and marketer of cheese alternative and dairy-related products, announced improved gross margins for the fourth quarter, but still recorded a net loss for both the quarter and the full year.

In spite of the improvement in margins, the company reported that it had been unable to pay US$2.4m in short-term notes which became due last month, and that its accountants had raised doubts over its ability to continue as a going concern unless this and the continued losses were addressed. But Galaxy's management remains confident that its current strategy would be able to put the company back on track.

"We anticipate that the report from our independent accountants, relating to our March 31, 2006 audited financial statements, will contain an explanatory paragraph stating that our recurring losses from operations and our inability to pay approximately $2.4m in short-term notes which became due June 15, 2006 raise substantial doubt about our ability to continue as a going concern," the company said in a statement.

"Management intends to address these concerns by refinancing these short-term notes and by receiving positive cash flow from operations as a result of its recent changes to the company's operations, mainly the outsourcing of its manufacturing and distribution functions. If we are not successful in refinancing the $2.4m in short-term notes or in otherwise entering into a financing, sale, or business transaction that infuses sufficient cash resources into the company in the near future, management believes that it may no longer be able to continue the implementation of its current business plan and that there would be a material adverse affect on the liquidity and financial condition of the company."

Galaxy reported that for the three months to the end of March 2006, it posted a net loss of US$1.83m, or $0.09 per share. However, the net loss was significantly reduced from the loss of $2.55m, or $0.14 per share, recorded in the same period last year. Net sales for the quarter fell from around $10.8m to approximately $8.4m.

The company reported a net loss to common stockholders of $24.15m, or $1.23 per share, for the full year, compared with a net loss of $4.26m, or $0.25 per share, in the previous fiscal year. The company pointed out that operating results for the latest year included non-cash expenses of $10.1m related to a reserve on a non-recourse stockholder note, $1.6m associated with disposal activities, and $7.9m in asset impairment charges.

Net sales for the full year fell to $37.8m from $44.5m the previous year. Galaxy attributed the fall in net sales during the quarter and fiscal year to a reduction in private label sales to Wal-Mart and customer resistance to multiple price increases that were implemented in response to rising raw material and other production costs.
However, gross margin improved to 26% of sales for the full year, from 22% in fiscal 2005. For the fourth quarter, gross margin reached 34% of sales, compared with 18% in the fourth quarter of the last fiscal year.

"Our operations have stabilised significantly in the past several months, as the outsourcing of our production and distribution activities has begun to reflect itself in lower manufacturing, inventory, distribution and overhead costs," said CEO Michael E. Broll. "Our financial results continued to be significantly impacted by non-standard costs in the fourth quarter, when 100% of our operating loss was due to costs related to disposal activities and strategic alternatives, as well as a further non-cash charge associated with the previously disclosed default by a stockholder on a non-recourse note receivable."

Broll added that he was particularly pleased with the improvement in gross margin to 34% of sales in the fourth quarter of fiscal 2006, compared with 26% for the full year, and 18% in the fourth quarter of fiscal 2005.

"During the current fiscal year, we plan to reduce marginally profitable private label and Galaxy imitation sales in order to improve our gross margin further," he said. "Thus, while we expect sales to decline in fiscal 2007, our goal is to restore the company to profitability and generate positive cash flow from operations. In addition to further reductions in corporate overhead, we expect consulting, legal and audit expenses related to major contracts and review of strategic alternatives to decline significantly during fiscal 2007. Our financial goals appear realistic based on currently available information."